Hedge funds, money laundering, and their exemption from the Patriot Act

money laundering

Business Week. July 2006. Little if anything has changed since this was written. (Emphasis added)

When drug runners and terrorists want to park illicit cash, there may be no better haven than hedge funds. Despite tough new anti-money laundering standards put out by U.S. regulators for banks, mutual fund companies, insurers, and money transmitters, the highly secretive hedge fund industry has no restrictions whatsoever. Says Peter Djinis, an attorney and former executive assistant director for regulatory policy at the Treasury Dept.’s Financial Crimes Enforcement Network (FinCEN): “The lack of controls is conspicuous.”

It gets worse. Feeder funds are not required to divulge to hedge funds who their clients and the hedge funds make a point of not asking. And get this – hedge funds are not included under the Patriot Act. If you or I buy a car, it gets reported to the government under the Patriot Act. But hedge funds financial transactions do not have to be reported. Gosh, a system like that almost seems custom-designed as a way to launder money, doesn’t it?

The fix is in. WaPo reported in Nov. 2008 that Treasury has withdrawn their proposed rules to include hedge funds under the Patriot Act.

“Hedge funds do represent some risk because their operations and the identity of investors are generally not very transparent,” said Steve Hudak, a spokesman for the Financial Crimes Enforcement Network of the Treasury Department. But “that risk needs to be studied and carefully assessed prior to implementing any anti-money-laundering regulations.”

Translation: We will carefully study the proposal then kill it. Besides, lots of us want to work in the financial sector when we leave our low-paying government jobs.

Again, if I buy a car, the transaction is reported to see if maybe I’m laundering money. But Treasury continues to ignore the hundreds of billions in hedge fund transactions. I certainly can’t see how a hands-off system like that could be abused, can you?

More evasive gobbledygook, this time from a supposed champion of the people

Hedge funds need regulation “to make sure the incentives are right for them and others to do the right thing,” Rep. Henry A. Waxman (D-Calif.), chairman of a House committee investigating the global credit crisis, said last week. “Certainly we need more transparency.”

Who knew that the delicate hedgies had to be incentivized to do the right thing while the rest of us simply have to follow the law or risk getting arrested?

Sen. Chuck Grassley and Carl Levin introduced the Hedge Fund Transparency Bill in Jan. 2009 which takes a few baby steps.

The bill introduced today would require hedge funds to establish anti-money laundering programs and report suspicious transactions.

As far as I can tell, it hasn’t passed yet, and I’m not sure of the status of the bill.

I’ll close with this.

UN crime chief says drug money flowed into banks (Jan 2009)

The United Nations’ crime and drug watchdog has indications that money made in illicit drug trade has been used to keep banks afloat in the global financial crisis, its head was quoted as saying on Sunday.

This would almost certainly include hedge funds and probably the stock market, as well as banks. Given the recent hedge fund arrests for insider trading, it really does seem as though our entire financial system has been corrupted.